Lack of London office supply will bite leading to rental kick up in 2012

Savills report estimates a take up of 5.5m sq ft in West End and City markets in 2011

Article posted: 02 Feb 2011

According to a report by property experts Savills, the demand from non domestic buyers in the investment markets will continue driving a further fall in yields for the driest assets, following a year in which the West End saw a greater volume transacted in comparison to the City for the first time since 1999.

Savills suggests that lease expiries will be the main driver of take up of office space in the West End and City markets of over 5.5 m sq ft in 2011, rising to in excess of 6m sq ft in 2012. Large units were key drivers of demand in 2010, with nine lettings over 100,000 sq ft, but Savills says this trend will reverse and 2011 will see the majority of occupiers seeking space of less than 50,000 sq ft. The legal and banking sector will continue to dominate the City market whilst the business services market will show the greatest appetite for West End space.

Mat Oakley, head of commercial research at Savills, says: "There is a notable shortage of units greater than 50,000 sq ft in the City. In the West End undersupply in particular of Grade A space is ubiquitous. However fringe locations that do have some stock such as Paddington and Kings Cross will see a rise in demand.  Meanwhile austerity measures are set to provide the prudent landlord with an opportunity to redevelop public sector space that has been disposed of.”

According to Savills data, the government occupies 19m sq ft of office space in London, 70% of which is in the West End. Given that the average annual level of development completions in the City between 2011-2015 is only 1.1m sq ft per annum (compared to an historic average of 3.1m sq ft per annum) and is similarly low in the West End, the impending shortages of supply might be alleviated by rationalisation of government stock.

In terms of the investment market, Savills suggests that that strong projected rental growth in the long term will continue to attract investment in office space in London. In 2010, 70% of buyers were from overseas and these investors accounted for 25 out of 33 of the deals transacted over £100m. 

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Posted by Jo